D.C. Apartment Construction Approaching Record Levels
Booming construction and uncertainty about the Washington, D.C., metro’s job market will continue to soften apartment operations through the remainder of the year. While overall employment rises, government furloughs are taking a toll on private-sector employment, as many companies dependent on government contracts will have to cut back on hiring as spending is curtailed. Meanwhile, a record number of units are underway throughout the region, and apartment stock will rise 4.3 percent as these projects are completed over the next two years. Nearly half of this year’s new inventory will come online in the fourth quarter, pushing vacancy to the highest level since early 2010 and slowing the pace of effective rent growth. Meanwhile, the condo market is tight with just an average of nine-and-a-half months of new inventory available, significantly down from pre-recession levels. The majority of projects in the pipeline have less than 50 units and are not enough to meet the growing need for housing. This demand will likely spill into the rental market, as these would-be owners wait on the sidelines for new projects to pencil.
Meanwhile, some larger Class A apartment developments may be ripe for conversion to condos, lessening the impact on apartment operations and meeting the demands of the for-sale condo market. The metro remains a hotbed for activity, with REITs, institutions, and local investors snatching up properties throughout the region. Class A cap rates have dipped below 5 percent in some instances, especially in submarkets where vacancy remains tight despite rising inventory. However, the amount of Class A product under construction has some of these large investors waiting to see how the market plays out. Local buyers, meanwhile, are chasing value-add deals throughout the metro, though limited inventory is hindering transaction velocity. Instead, investors are heavily targeting assets in prime corridors, including 14th Street, H Street, Fort Totten, and other pockets east of the Anacostia River, including Congress Heights and Petworth.